–‘Number’ of Members Saw Risk Employment Gains Could Diminish
WASHINGTON (MNI) – The following is the section of the Federal Open
Market Committee minutes of the March 13 meeting devoted to the views of
the participants, published Tuesday:
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and outlook, meeting
participants agreed that the information received since the Committee’s
previous meeting, while mixed, had been positive, on balance, and
suggested that the economy had been expanding moderately. Labor market
conditions had improved further: Payroll employment had continued to
expand, and the unemployment rate had declined notably in recent months.
Still, unemployment remained elevated.
Household spending and business fixed investment had continued to
advance. Despite signs of improvement or stabilization in some local
housing markets, most participants agreed that the housing sector
remained depressed. Inflation had been subdued in recent months,
although prices of crude oil and gasoline had increased of late.
Longer-term inflation expectations had remained stable, and most meeting
participants saw little evidence of cost pressures.
With respect to the economic outlook, participants generally saw
the intermeeting news as suggesting that economic growth over coming
quarters would continue to be moderate and that the unemployment rate
would decline gradually toward levels that the Committee judges to be
consistent with its dual mandate. While a few participants indicated
that their expectations for real GDP growth for 2012 had risen somewhat,
most participants did not interpret the recent economic and financial
information as pointing to a material revision to the outlook for 2013
and 2014. Financial conditions had improved notably since the January
meeting: Equity prices were higher and risk spreads had declined.
Nonetheless, a number of factors continued to be seen as likely to
restrain the pace of economic expansion; these included slower growth in
some foreign economies, prospective fiscal tightening in the United
States, the weak housing market, further household deleveraging, and
high levels of uncertainty among households and businesses. Participants
continued to expect most of the factors restraining economic expansion
to ease over time and so anticipated that the recovery would gradually
gain strength. In addition, participants noted that recent policy
actions in the euro area had helped reduce financial stresses and lower
downside risks in the short term; however, increased volatility in
financial markets remained a possibility if measures to address the
longer-term fiscal and banking issues in the euro area were not put in
place in a timely fashion. Inflation had been subdued of late, although
the recent increase in crude oil and gasoline prices would push up
inflation temporarily. With unemployment expected to remain elevated,
and with longer-term inflation expectations stable, most participants
expected that inflation subsequently would run at or below the 2 percent
rate that the Committee judges most consistent with its statutory
mandate over the longer run.
In discussing the household sector, meeting participants generally
commented that consumer spending had increased moderately of late. While
a few participants suggested that recent improvements in labor market
conditions and the easing in financial conditions could help lay the
groundwork for a strengthening in the pace of household spending,
several other participants pointed to factors that would likely restrain
consumption: Growth in real disposable income was still sluggish, and
consumer sentiment, despite some improvement since last summer, remained
weak. A number of participants viewed the recent run-up in petroleum
prices as likely to limit gains in consumer spending on non-energy items
for a time; a couple of participants noted, however, that the
unseasonably warm weather and the declining price of natural gas had
helped cushion the effect of higher oil and gasoline prices on
consumers’ overall energy bills. Most participants agreed that, while
recent housing-sector data had shown some tentative indications of
upward movement, the level of activity in that sector remained depressed
and was likely to recover only slowly over time. One participant, while
agreeing that the housing market had not yet turned the corner, was more
optimistic about the potential for a stronger recovery in the market in
light of signs of reduced inventory overhang and stronger demand in some
regions.
Reports from business contacts indicated that activity in the
manufacturing, energy, and agriculture sectors continued to advance in
recent months. In the retail sector, sales of new autos had
strengthened, but reports from other retailers were mixed. A number of
businesses had indicated that they were seeing some improvement in
demand and that they had become somewhat more optimistic of late, with
some reporting that they were adding to capacity. But most firms
reportedly remained fairly cautious-particularly on hiring decisions-and
continued to be uncertain about the strength of the recovery.
Participants touched on the outlook for fiscal policy and the
export sector. Assessments of the outlook for government revenues and
expenditures were mixed. State and local government spending had
recently shown modest growth, following a lengthy period of contraction,
and declines in public-sector employment appeared to have abated of
late. However, it was noted that if agreement was not reached on a
longer-term plan for the federal budget, an abrupt and sharp fiscal
tightening would occur at the start of 2013. A number of participants
observed that exports continued to be a positive factor for U.S. growth,
while noting risks to the export picture from economic weakness in
Europe or a greater-than-expected slowdown in China and emerging Asia.
Participants generally observed the continued improvement in labor
market conditions since the January meeting. A couple of participants
stated that the progress suggested by the payroll numbers was also
apparent in a broad array of labor market indicators, and others noted
survey measures suggesting further solid gains in employment going
forward. One participant pointed to inflation readings and a high rate
of long-duration unemployment as signs that the current level of output
may be much closer to potential than had been thought, and a few others
cited a weaker path of potential output as a characteristic of the
present expansion. However, a number of participants judged that the
labor market currently featured substantial slack. In support of that
view, various indicators were cited, including aggregate hours, which
during the recession had exhibited a decline that was particularly
severe by historical standards and remained well below the series’
pre-recession peak; the high number of persons working part time for
economic reasons; and low ratios of job openings to unemployment and of
employment to population.
Most participants noted that the incoming information on components
of final spending had exhibited less strength than the indicators of
employment and production. Some participants expressed the view that the
recent increases in payrolls likely reflected, in part, a reversal of
the sharp cuts in employment during the recession, a scenario consistent
with the weak readings on productivity growth of late. In this view, the
recent pace of employment gains might not be sustained if the growth
rate of spending did not pick up. Several participants noted that the
unseasonably warm weather of recent months added one more element of
uncertainty to the interpretation of incoming data, and that this factor
might account for a portion of the recent improvement in indicators of
employment and housing.
In a contrasting view, the improvements registered in labor market
indicators could be seen as raising the likelihood that GDP data for the
recent period would undergo a significant upward revision.
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** MNI Washington Bureau: 202-371-2121 **
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